MODERATING EFFECT OF FINANCIAL EFFICIENCY ON THE RELATIONSHIP BETWEEN ECONOMIC GROWTH AND POVERTY LEVELS IN THE EAC COUNTRIES

Abstract

The main objective of the study was to examine the moderating effect of financial efficiency
on the relationship between economic growth and poverty levels in the East Africa
countries. The hypothesis was that financial efficiency has no effect on the link between
economic growth and poverty levels in East African Community countries. The study
adopted descriptive research designs. The study population was the five countries of EAC
countries which included Kenya, Rwanda, Uganda, Burundi, and Tanzania. Annual data
for 30 years beginning 1989 to 2018 was gathered for the study purpose. Secondary data,
which consisted of annual data, was utilized in the study. The data was analyzed using both
descriptive and inferential statistics with the help of excel and STATA version 14. The
Descriptive statistics included the mean, standard deviation, minimum and maximum. The
study then performed diagnostic test including normality, heteroscedasticity,
multicollinearity, serial correlation and unit roots tests to establish the robustness of the
models chosen. Inferential statistics involved Feasible Generalised Least Squares (FGLS)
panel data regression models to ascertain the causal effect relationship between economic
growth, financial efficiency and poverty levels in EAC member countries. The test of
hypothesis was examined at 5% significance level. The study revealed that financial
efficiency has no significant moderating effect on the link between economic growth and
poverty levels in East African Community countries. Given that economic growth has a
significant effect on poverty levels in EAC countries, the finding implies that improvement
of economic growth was crucial in enhancing poverty reduction among countries in east
Africa. The study therefore recommends that the government in general and ministries of
planning and economic affairs of EAC countries should put down concrete plans and
concerted actions aimed improving economic growth rates. Additionally, the EAC
countries’ central banks and the government ministries of finance and treasury should
keep the rate of inflation at one-digit level to ensure that economic growth is not eroded by
increased general price level in the economy. Increased economic growth means improved
income for the general population, especially the poor masses. Finally, concerning financial efficiency, it was established that financial efficiency has no significant effect on the link
between economic growth and poverty levels in East African Community countries.
However, the effect of financial efficiency on poverty was positive hence the study
recommends to EAC governments and regulatory authorities to put down plans and
policies aimed at making the financial sector efficient. Efficient financial sector is associated
with reduced cost of financial intermediation and a banking sector that is not efficient is
linked with high cost of financial intermediation.